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March 5, 2007

How Much Is the War on Iraq Costing You?


Part 1

David R. Henderson

How much is the U.S. war on Iraq costing you? That depends on who you are. For Iraqis, Americans, or Brits who were killed, it cost them everything. I say it in that order because that is the order in numbers killed. So far, a conservative estimate of the number of Iraqi civilians killed in the war is about 57,000, the number of Americans (including contractors) about 3,800, and the number of Brits 133. And if one were to add in the number of non-civilian Iraqis killed – and one should – the number of civilian and non-civilian Iraqis killed would likely be well over 70,000. Of course, other studies, such as the Lancet study, have found a much larger number of Iraqi deaths, more than 650,000. But I cannot judge such studies without reading them carefully, so I'm giving lower-bound estimates here.

But there is another cost to which I can bring my economist's expertise, namely the cost in federal spending and in higher oil prices to Americans. In this article, I'll consider only the increase in federal spending and how that is paid for. In my next article, I'll consider the increase in the price of oil. Let me give you a quick bottom line, though: if you're a high-income person in the United States, you're paying a huge amount for this war.

To estimate the cost of the Iraqi war to the U.S. government, I'll assume, as most people do, that the war started in late March 2003. It should be noted, though, that this is not quite accurate. The war has actually been going on more or less continuously since January 1991. In the 1990s, the U.S., British, and French governments established a "no-fly zone" over which they patrolled so that the Iraqi military would not go there, and they often bombed and strafed to enforce this restriction. But put that aside for these purposes. The Congressional Budget Office estimates that in fiscal years 2003, 2004, 2005, and 2006, the U.S. government spent $46 billion, $68 billion, $53 billion, and $87 billion carrying out the war. In other words, the U.S. government spent $254 billion through Sept. 30, 2006 (the end of fiscal year 2006). It will almost certainly spend a minimum of $400 billion before the U.S. role in the war is over. Ironically, this $400 billion is well above the $100 to $200 billion estimate that my former Council of Economic Advisers colleague, Larry Lindsey, gave while a member of the Bush administration. This estimate got Lindsey into hot water because various of his critics in the administration claimed it was too high. The $46 billion in fiscal 2003 is really a $92 billion rate for the calendar year because the period from late March to the end of September is the last half of the fiscal year. So the average for the last four fiscal years is $75 billion a year ($92b + $68b + $53b + $87b all divided by four.)

Let's assume an annual budget cost of $75 billion. Billions, to most people, are abstractions. So let's put it in individual or family terms. There are approximately 300 million individuals in the United States and approximately 120 million families. So, the average cost per American resident per year has been $75 billion divided by 300 million, or $250. The average cost per family has been about $625 per year. And that has been for four years.

But averages are almost always misleading. At the incoming Ph.D. student orientation at UCLA in 1972, when I entered the economics program there, one of my professors, Axel Leijonhufvud, told us that the average pay made by the graduating undergrad economics majors at a particular university (I've forgotten which) was $40,000 in those year's dollars (which would be about $190,000 today.) That got our attention. Then he grinned and pointed out that one of the graduating economics majors was a well-known basketball star who had just signed with an NBA team. So much for averages.

So, let's go beyond averages here. Who pays for the federal government's spending? A starting point is to look at the percent of overall tax revenue paid by people in various income groups. The federal tax system, taken as a whole, unlike the state tax system, is "progressive." "Progressive" doesn't mean "good"; it means that the tax system takes a higher percent of income, not just a higher amount of income, from higher-income people. So, for example, if, in 2003, you were in the bottom quintile, that is, the lowest fifth of households (note: households are not always the same as families), then, according to the Congressional Budget Office (CBO), you paid 4.8 percent of your income in federal taxes of all forms. Why so low? Because most people in the bottom quintile pay close to zero federal income tax, and many of them get the "Earned Income Credit," which makes their federal income taxes negative. Many of them pay the Social Security payroll tax (FICA) and the Medicare tax, but many of them don't earn income and, therefore, don't pay even these taxes. The main other taxes left to consider are corporate taxes and excise taxes on such things as cigarettes, alcohol, and gasoline. Low-income people pay a higher percent of their income on excise taxes than higher-income people do because they spend a higher percent of their income on cigarettes, alcohol, and gasoline. Lower-income people probably pay more of the corporate income tax than the CBO assumes because the CBO assumes that the people who pay the corporate income tax are the owners of the corporations. But decades of theoretical and empirical work by economists bring this assumption into question. The corporate income tax, all other things equal, causes less investment in corporations, thus reducing the supply of capital. This means higher prices for consumers and lower wages for workers because they have less capital to work with. Still, a correction for this would probably not cause the correct number for the share of income paid in federal taxes for the lowest quintile to be above 6 percent of income. Moreover, the bottom quintile's share of overall federal taxes paid was only 1 percent.

Consider the other end of the income range – the top quintile. Using the assumptions about allocation of tax burden noted above, the CBO found that households in the top quintile (whose average income in 2003 was $184,500) paid 25 percent of their income in all federal taxes in 2003. Moreover, the top quintile's share of all federal taxes paid by everyone was a whopping 65.7 percent. This last estimate is probably a few percentage points too high because of the above-noted assumption the CBO makes about the distribution of the corporate-tax burden. Still, a correct estimate of the top quintile's share of taxes would surely be above 60 percent, and a correct estimate of their income paid in taxes would surely be above 23 percent.

So, assuming that the spending on the Iraq war was paid for with taxes, the bottom quintile's share was 1 percent of $75 billion, or $750 million. Because there were 23 million households in the bottom quintile, that quintile's share of extra taxes averaged $33 per household. The top quintile's share of that annual $75 billion was over 60 percent of $75 billion, or over $45 billion. Therefore, this top quintile, which had 22.8 million households, paid an average of $1,974 a year in extra taxes to finance the war. To this member of the top quintile, that is a lot of money. The top quintile had substantially more members per household than the bottom quintile. Indeed, this is one of the main reasons they were the top quintile; not only did they have more members but they also had three times as many workers per household as the bottom quintile. So, assuming an average of four members per top-quintile family, the extra taxes amounted to just under $500 per person per year.

If we go further up the income range, we get even bigger cost numbers for two reasons: first, because there was more income to tax, and second, because higher-income people are taxed at a higher rate. So, for example, the top 5 percent, whose average income in 2003 was $377,300, paid an average of 28.4 percent of their income in taxes and paid 56.6 percent of all federal taxes. Reducing this percentage a bit to adjust for the overstatement due to the CBO's methodology, this top 5 percent surely paid at least 50 percent of federal taxes. So their share of the $75 billion was at least $37.5 billion. With 5.8 million households in the top 5 percent, this amounts to a whopping $6,466 per household per year.

In short, high-income people are paying a very high share of the budget cost of the U.S. war on Iraq.

Given the size of the federal budget deficit, one can challenge my assumption that the war was paid for out of taxes rather than with debt. If the war is financed purely with debt, then saying who bears the burden requires knowing how the future tax burden will be allocated. Assuming that it's allocated roughly the same in the future as now, we can say that future high-income people will bear an outsized share of the tax burden. But now with a Democrat-controlled Congress, the assumption that the war is financed by current taxes is less bad an assumption than you might think. If, for every dollar of government spending, the Congress refrains from extending a one-dollar tax break, then, in a sense, the war is financed by current taxes. For example, what if Congress would have extended a $75 billion annual tax break but, because of the war spending, refrains from doing so? Then the result of war spending is that taxes are $75 billion higher than otherwise. One large tax break that expired at the end of 2006 was the temporary relief from the Alternative Minimum Tax (AMT). The Democratic Congress, whose members come disproportionately from states whose residents will be disproportionately bit by the AMT, might not extend the relief from the AMT. If they don't, the main reason will be the deficit. The AMT hits people in the upper-middle-income and upper-income brackets. So we're still back to higher-income people, though no longer the highest-income people (because for most of them, their normally calculated taxes exceed the AMT) bearing a large portion of the cost of war.

There's one cost of the war that falls disproportionately on lower income people – the cost of oil. In my next column, I will address that.

Copyright © 2007 by David R. Henderson. Requests for permission to reprint should be directed to the author or Antiwar.com.

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David R. Henderson is a research fellow with the Hoover Institution and an associate professor of economics in the Graduate School of Business and Public Policy at the Naval Postgraduate School. He is author of The Joy of Freedom: An Economist’s Odyssey and co-author, with Charles L. Hooper, of Making Great Decisions in Business and Life (Chicago Park Press.) His latest book is The Concise Encyclopedia of Economics (Liberty Fund, 2008.)

He has appeared on The O’Reilly Factor, the Jim Lehrer Newshour, CNN, and C-SPAN. He has had over 100 articles published in Fortune, the Wall Street Journal, Red Herring, Barron’s, National Review, Reason, the Los Angeles Times, USA Today, and the Christian Science Monitor. He has also testified before the House Ways and Means Committee, the Senate Armed Services Committee, and the Senate Committee on Labor and Human Resources. Visit his Web site.

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